UK 10-year gilt yields climbed to 5%, marking their highest level since May 19. This surge is attributed to rising oil prices, with Brent crude surpassing $90 a barrel due to retaliatory strikes between the US and Iran, fueling inflation fears and strengthening expectations of the Bank of England maintaining higher interest rates for longer. Investors are closely monitoring Andy Burnham as he assumes the role of Prime Minister today, with particular attention on his upcoming Chancellor selection.
Reports that Shabana Mahmood is the leading candidate for Chancellor are helping to alleviate market concerns regarding a more expansionary fiscal policy. The market's focus has shifted to Burnham's cabinet appointments as he navigates the economic landscape, especially given the UK's current debt burden and fiscal pressures. The outlook for interest rates now fully prices in a rate hike by year-end, with an additional increase anticipated by March 2027.
Burnham's past comments about the UK not being "in hock" to bond markets have made investors wary of his potential for greater borrowing. His administration faces the challenge of a "hyper-reactive" bond market, a consequence of past administrations' fiscal decisions. While resilient economic data, including a 0.1% growth in May and a 0.7% expansion over three months to May, reinforces rate hike expectations, some Bank of England policymakers suggest that the UK's weak economy might reduce the necessity for further tightening despite inflation risks from the Iran conflict.
